Andy Friedman of The Washington Update.

The upcoming “massive” legislative and fiscal negotiation that will ensue among lawmakers in September will lead to market volatility as well as some new tax changes, warns political analyst Andy Friedman of the Washington Update.

In his recently released white paper, “Wake Me up When September Ends,” Friedman points to the four issues that Congress must grapple with when they return from their August recess.

Congress looks to be arranging for all of the four major “forcing event” deadlines to occur around a single date — Sept. 30 — setting up what Friedman says will be a massive negotiation in the preceding month.

Lawmakers, Friedman points out, must agree on not only raising the debt ceiling, but also government funding, tax extenders and highway funding. House lawmakers did agree on May 19 to a two-month highway funding extension, but as Friedman notes, Congress will need to find a permanent source for highway funding.

Congressional borrowing authority ended on March 15, and “current estimates suggest the government will run out of money and need to borrow by around early October,” Friedman says. “Failure to raise the debt limit by that time would impinge on the government’s ability to pay interest on debt outstanding, leading to default on U.S. debt.”

As the Sept. 30 deadline to raise the debt ceiling gets closer Congress and the administration are likely to continue to “bicker,” Friedman warns, markets may get volatile.

“I have long said that a market decline over concern about Congress’ impending failure to act is a buying opportunity. Congress will act — likely at the last minute — at which point the market will recover,” Friedman writes.

“It is incumbent on investors and financial advisors to keep these ‘forcing event’ dates in mind as investment opportunities.”

As to government funding, the federal government’s fiscal year ends on Sept. 30. By that date, Congress must appropriate money to run the government next year. Otherwise the federal government will shut down on Oct. 1.

As to tax extenders, Congress wants to extend a popular group of tax provisions that expired at the end of last year, Friedman writes, with Rep. Paul Ryan, R-Wis., chairman of the tax-writing House Ways and Means committee, wanting to take up the extenders during the funding discussions in September. Of course, meeting the deadlines requires funding for new government initiatives, such as additional defense spending and funding long-term highway construction, forcing lawmakers to search for “loophole closers” — provisions in the tax code that arguably provide unduly favorable benefits, Friedman writes.

One way to fund these new initiatives could be corporate tax reform. 

“As if addressing these deadlines was not enough, Chairman Ryan hopes to have a corporate tax reform plan ready by the end of the summer,” Friedman says, as it “appears that reforming individual taxes is now recognized as too difficult politically.”

If Congress and the White House can agree on corporate reform, which Friedman says is “possible but difficult, then the funds from a deemed (Democrats) or optional (Republicans) one-time repatriation of foreign earnings could be used to fund the permanent highway bill. Otherwise, Congress will have to find revenue raisers to pay for highway funding and extenders; Ryan says using repatriation funding without tax reform is a no-go.”

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